Derived Measurement in Macroeconomics: Two Approaches for Measuring the NAIRU Considered

Abstract:     
This paper investigates two different procedures for the measurement of the NAIRU; one based on structural modeling while the other is a statistical approach using Vector Auto Regression (VAR)-models. Both measurement procedures are assessed by confronting them with the dominant theory of measurement, the Representation Theory of Measurement, which states that for sound measurement a strict isomorphism (strict one-to-one mapping) is needed between variations in the phenomenon (the NAIRU) and numbers.

The paper argues that shifts of the Phillips-curve are not a problem for the structural approach to measurement of the NAIRU, as the NAIRU itself is a time-varying concept. It is however, the impossibility to identify the exact shape of the Phillips-curve that causes problems of multiple empirical, relational forms and hence non-unique isomorphic mappings for measurement. While VAR-models are being accused of being ‘atheoretical macroeconometrics’ in the literature, the Wold decomposition theorem applied to the VAR brings out a stable correspondence between variance of the phenomenon (the NAIRU) and numbers and turns the set of equations into an isomorphic mapping that can serve as a useful foundation for the construction of a measuring instrument.

Number of Pages in PDF File: 33

Keywords: NAIRU, Phillips Curve, VAR-Models, Measurement in Macroeconomics

JEL Classification: B12, B41

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